Regulatory and governance environment

Taking the board’s temperature on regulation

Regulatory and other developments regarding shareholder proposals for proxy access, conflict minerals, mandatory auditor rotation, compensation clawbacks… boards of directors continue to face an active regulatory and enforcement environment. They’re also digesting the impact and consequence of new regulations and enforcement initiatives that have already been implemented.

What worries directors?

  • The possibility of mandatory auditor rotation, with 70% of directors expressing at least some “substantial” concern about the prospect.
  • And 59% have the same level of concern about Dodd-Frank disclosure rules on CEO/median worker pay ratios.
  • But only 31% directors are concerned about proposed rules on conflict minerals, despite the fact that public companies have to comply with them on May 31, 2014. The Securities and Exchange Commission expects the rules will affect about 6,000 public companies.

Board agendas are full, and they cover many issues. Time is limited, so directors must prioritize which issues they want to spend time discussing. About half of directors plan to spend at least some time on proposed mandatory auditor rotation rules and proposed rules on clawbacks. The SEC is expected to approve a rule requiring companies to disclose the pay gap between the CEO and the average employee. So it’s not surprising that 48% of directors want to spend time on this issue.

When it comes to the many new regulations and enforcement initiatives, directors are skeptical about their intended effect. More than three-quarters say they haven’t increased public trust in the corporate sector “very much,” 64% say they haven’t increased investor protections, and 51% say they haven’t enhanced transparency to stakeholders. Nearly three-fourths of directors believe they’ve added costs to the company that exceed their benefits.

What's worrying boards?
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